VCs trade biotech for social networking

NEW YORK Tue Apr 5, 2011 9:51am EDT

Frederick Frank, vice chairman of Peter J. Solomon Company, speaks during the Reuters Global Mergers and Acquisitions Summit in New York, April 4, 2011. REUTERS/Brendan McDermid

Frederick Frank, vice chairman of Peter J. Solomon Company, speaks during the Reuters Global Mergers and Acquisitions Summit in New York, April 4, 2011.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Venture capitalists are shifting their attention to social networking companies and away from biotech companies, bankers told the Reuters Global Mergers and Acquisitions Summit on Monday.

Venture capitalists, who make high-risk investments in start-ups, are tired of waiting years for biotech companies to generate real products and be marketable as initial public offerings, bankers said. They'd rather invest in companies that could go public in just a year or two.

"Think of an IPO for an early stage biotech company. You're 5, 7, 9 years away from revenues and profitability. That's a big stretch today for most investors," said Frederick Frank, vice chairman at investment banking advisory firm Peter J. Solomon Company.

"The IPO market for biotech companies is close to moribund," he added.

A quicker turnaround on an investment could be attractive. In August 2008, the IPO market dried up, preventing investors including venture capital funds from exiting investments for about a year.

"Look at the choice a venture capital fund has: to invest in the next social network that might go public in 12 months, versus a scientific idea where they might get the opportunity to take it to the FDA eight years from now, and then maybe get a letter where they have to do additional clinical trials on top of that," said Drew Burch, head of healthcare mergers and acquisitions at Barclays (BARC.L) in New York.

"A greater percentage of the dollars has moved toward technology investments," Burch said.

That's not just true for venture capitalists. Wealthy investors are eager to buy shares of social media companies like Facebook, even before those companies go public.

Following a high-profile private share sale earlier this year, Facebook said it would open its books to investors in 2012 -- a statement many say is code for an IPO. The social network is the largest in the world.

Groupon has spoken with bankers about an IPO. Other Internet companies including Zynga and Twitter are expected to tap the public markets.

Private market valuations of some social media companies are in the multibillion dollar range.

(Reporting by Clare Baldwin; Editing by Richard Chang)

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